Finance Business Act to be amended

As the Central Bank is in the process of introducing a new Banking Act, in place of the existing one, the regulator has also undertaken a fresh project to introduce amendments to the Finance Business Act (FBA), No. 42 of 2011, the statute applicable for the regulation and supervision of licensed finance companies (LFCs). 

The project has received the approval of the Monetary Board to develop the legal framework governing the finance and leasing companies in the country, in line with the international standards. 

The main aim of the initiative is to address the lacunas in the existing law and to further strengthen the regulatory framework applicable to the sector. 

Also, the amended law will give more regulatory and supervisory powers to the Monetary Board and Director of the Supervision of Non-Bank Financial Institutions Department. 

Another area, which will be revisited under the project, would be the provisions on directors of non-bank financial institutions’ disqualification criteria.

 
Further, revisions would also be undertaken in respect of fit and proper assessments in respect of the directors of LFCs, in line with the international standards. 

The amendments to the FBA come at a time when the Central Bank had already developed the initial draft of the new Banking Act to replace the existing Banking Act, No. 30 of 1988, which contains additional criteria for licensing of banking institutions and regulation and supervision of financial holding companies.

 This also comes in the wake of the draft of the New Credit Regulatory Authority Act receiving the Cabinet nod, which will effectively replace the existing Microfinance Act, with the aim of providing more rigorous regulation of money lending activities and also to provide a legal framework for consumer protection. 

The Central Bank has taken several measures to strengthen the regulatory oversight on finance and leasing companies, which have shown relative instability in the recent past, leading to liquidation of several of them. 

The enhanced minimum capital rules also have forced finance companies to either raise capital or to merge with suitable partners.

The sector has been reeling with decelerated growth, poor asset quality and weak earnings since 2016, after a credit spurt in 2015 came to an abrupt end. The situation was exacerbated by the pandemic-induced business disruptions, which sent the sector’s non-performing loans ratio to nearly 14 percent last year.